Micron and Intel Part Ways, and Micron Bulls Love It

Intel (INTC) shares are trading lower today, and Micron Technology (MU) shares are trading higher, after the two last night announced they will part ways on their “3D XPoint” memory technology.

This is perhaps not entirely a surprise to the Street, as Intel and Micron had already announced an end to their NAND flash-chip partnership back in January.

Intel’s vice president for its “non-volatile memory solutions group," Bill Leszinske, explained in a telephone call today that I had with him that when the “goals” of the two companies were clearly changing, it made sense to conclude the joint venture.

That change of affairs is just fine for some Micron bulls, who see only upside in Micron going its own way.

Intel and Micron introduced 3D Xpoint back in 2015. It is a novel memory-chip technology that has no transistors; the two companies have never revealed the exact formula.

In addition to XPoint, Intel and Micron also have had a partnership for some time now to make ordinary NAND flash chips. Back in January, Intel and Micron said they would end their NAND development efforts with the third generation of “3-D” NAND, expected later this year to early next year. However, then-CEO Brian Krzanich offered no time frame for when the two would stop collaborating on XPoint, stating that "3D XPoint continues to be a joint effort."

In last night’s announcement, the duo said they will work together one more time on XPoint, for the “second generation” of the technology, which is "expected to occur in the first half of 2019.”

The handwriting was on the wall. Micron’s CEO Sanjay Mehrotra told analysts back in May that the company will have its own 3D XPoint products next year. And as my interview with Intel’s Rob Crooke suggested back in May, Intel’s more and more looking to its own priorities for the data-center computing market but also for client computing.

During our phone call today, Intel’s Leszinske, who works for Crooke, explained Intel’s vision for memory chips as being about “driving a new computer architecture,” in which "large pools of persistent memory”—basically, the Intel XPoint products, called “Optane”—would be coupled with petabytes worth of 3D NAND chips in the form of Intel’s solid-state drives.

Leszinske pointed out that Intel and Micron will continue to jointly own the factory in Lehi, Utah, known as the "Intel-Micron Flash Technologies” facility. However, going forward, they will no longer split development expenses 50-50.

“Eventually that will be our expense,” he said, “and we have not said what that is, but you can imagine it’s a pretty large price tag, and we may at some point in the future speak about that."

Leszinske said the “big thing is that obviously this change always creates additional challenges to work through, but we don’t see slipping the program, or changing the direction we’re going."

As I said, Micron bulls are just fine with this development.

Credit Suisse analyst John Pitzer, who has an Outperform rating on Micron shares, and a $90 price target, sees a net positive for Micron in this: better mix of product as Micron is getting more ambitious about making its own kinds of chips rather than just helping Intel.

“We believe this decision along with the 3D NAND decision continue to show MU's willingness to develop its own technology roadmap to optimize its business mix,” writes Pitzer, "and we expect mix to be a significant potential driver of fundamental outperformance."

Micron, he writes, is “focused on finding better homes for its bit."

Points out Pitzer, the economics of the joint venture with Intel on NAND have not been good for Micron: "MU is selling ~$550mn of NAND per year to Intel at low margins, which alone would drive up to ~$300mm/$0.25 upside to Rev/EPS."

Similarly, Amit Daryanani with RBC Capital, who has an Outperform rating on Micron stock, "based on our prior discussions, ending the JV is likely an indication that MU is ROI driven for cash outlays, be that for a JV or M&A,” meaning, making more off of its investments than what it has been getting from working with Intel.

Micron shares are up 77 cents, or 1.4%, to $56.92, while Intel stock is down 28 cents, or half a percent, to $51.73.

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